Former ECB Official Sees Few Obstacles To QE

The European Central Bank could boost growth and inflation if it launched a big asset-buying program, known as quantitative easing, but it can’t do it for a variety of technical and political reasons.

Or at least that’s roughly where conventional wisdom seems to have settled in recent months. But it’s not the view of former ECB board member Jose Manuel Gonzalez-Paramo, who says the central bank could do QE but such a program would be unlikely to have a significant impact on the euro zone’s economic trajectory.

Many economists believe one of the reasons the ECB hasn’t followed the Federal Reserve and the Bank of England in making major purchases of public and private debt is because it faces unique challenges. The euro zone comprises 18 countries, each with its own government and private bond market, and the ECB is prohibited from doing anything that smacks of bailing out struggling governments.

Mr. Gonzalez-Paramo was in charge of market operations and the implementation of monetary policies at the ECB between 2004 and 2012. And he believes the obstacles to undertaking QE would be relatively easy to overcome, and assets could be found if policy makers wanted to buy them.

“You can build a basket depending on what you want to do,” Mr. Gonzalez-Paramo told reporters Monday at a lunch in London hosted by Spain’s IESE Business School, where he now serves as a visiting professor of economics. “It’s a matter of deciding which markets.”

Rather than being deterred by minor technical obstacles, Mr. Gonzalez-Paramo says there are other, good reasons why the ECB has yet to embark on QE. Unlike the U.S. and, to a lesser extent, the U.K., banks dominate the provision of credit in the currency area. So buying lots of bonds isn’t a very direct way of getting money to needy businesses or households.

“The euro zone is bank-based, so if you don’t focus your actions on banks, you might not get what you want,” he said.

That’s not to say that QE should be off the ECB’s menu of options, particularly when other available alternatives–such as a cut in the benchmark refinancing rate, or charging banks to hold their deposits—might not have a huge impact. Mr. Gonzalez-Paramo sees QE as “an extraordinary commitment device” that allows policy makers to assure investors that they won’t tighten policy soon, thus keeping longer-term interest rates low.

“When you have exhausted the alternatives, you have to think of everything,” Mr. Gonzalez-Paramo said. He added QE “is a complement to other measures, rather than the main protagonist.”

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